Question

HEARTfelt Bank currently has $200 million in transaction deposits on its balance sheet. The Federal Reserve has currently set the reserve requirement at 8 percent of transaction deposits. 1. Show the HEARTfelt Bank and Federal Reserve before there is a change in reserve requirements. 2. Now assume the Fed changes reserve requirement to 7%. Assume HEARTfelt withdraws all excess reserves and gives out loans and assume that borrowers eventually return 90% of the funds to HEARTfelt in the form of transaction depositions. Show the new balance sheet of HEARTfelt and the Fed. .

Answer 1

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1. Initial Balance Sheets:

Balance Sheet
Federal Reserve
Assets	Amount	Liabilities	Amount
Treasury Securities	$16 million	Reserve Accounts	$16 million
	$16 million		$16 million

Balance Sheet
HEARTfelt Bank
Assets	Amount	Liabilities	Amount
Reserve Accounts at the Federal Reserve	$16 million	Transaction deposits	$200 million
Loans ($200 million - $16 million)	$184 million
	$200 million		$200 million

2. After Changes

New initial required reserves = 7% of $200 million = $14 million

Balance Sheet
Federal Reserve
Assets	Amount	Liabilities	Amount
Treasury Securities	$14.824 million	Reserve Accounts	$14.824 million
	$14.824 million		$14.824 million

Balance Sheet
HEARTfelt Bank
Assets	Amount	Liabilities	Amount
Reserve Accounts at the Federal Reserve ($211.765 x 0.07)	$14.824 million	Transaction deposits	$211.765 million
Loans ($211.765 - $14.824)	$196.941 million	($200 + (($16-$14)x (1/(0.07 +(1-0.9)))))
	$211.765 million		$211.765 million